Unmodified report
From the information in the disclosure notes it is apparent that the company is not a going concern. However it is not clear on which basis the financial statements have been prepared. They may have been prepared:

• On the going concern basis: or
• On an alternative basis.

An unmodified auditor’s report means that:

• The accounts give a true and fair view
• They have been prepared in accordance with statute

If the accounts have been prepared on a going concern basis, an unmodified opinion would not be appropriate as this does not reflect the true position of the company. The results would be misleading as the readers would make assumptions about the company’s ability to continue, which are clearly not the case. In addition to the inappropriate basis of preparation, disclosure is inadequate as the notes to the accounts do not highlight the significant problems the company is facing. In this respect they are not properly prepared.
If the accounts have been prepared on an alternative basis an unmodified opinion would still not be valid. This is due to the inadequacy of disclosure. The going concern assumption is a fundamental principle. Readers of accounts assume the company is viable unless it is clearly stated otherwise. In this case even though the basis of preparation is correct the lack of disclosure means that they are not properly prepared.          (5 marks)

Alternative opinions
The ‘except for’ or disclaimer of opinion would not be appropriate irrespective of the basis of preparation as the issue is not one of uncertainty. The company has liquidated assets and we are told that the company has ceased to trade in October.

If the financial statements have been prepared on a going concern basis an adverse opinion should be expressed. This would be due to a material and pervasive misstatement as a result of the basis of preparation. For example assets and liabilities are likely to be misclassified as non-current, when they should be classified as current. The opinion would be adverse as the misstatement is pervasive to the overall true and fair view.

If the accounts have been prepared on an alternative basis reflecting that the company is not a going concern, for example the break-up basis, provided that this has been applied correctly the auditor would agree with this treatment. However a qualified ‘except for’ auditor’s opinion should be issued on the grounds of a material misstatement in respect of the adequacy of the disclosure regarding the basis of preparation.    (5 marks)

(i) Leasing of equipment and specialist staff. As Citilink Airlines leases its equipment and the most specialised of its staff from another airline, there is a risk that its equipment and/or pilots could be withdrawn leaving it unable to operate.
(ii) Conditions of exclusive right. The MOA requires Citilink Airlines’ aircraft engines be overhauled biannually. There is a risk that Citilink Airlines will be unable to meet this condition, if the lessor company does not agree to regular overhaul or that it will be too expensive for Citilink Airlines to meet this requirement and it could lose the right to operate, or its exclusivity, opening it up to competition. There may be other conditions which Citilink Airlines has to meet, such as the two weekly flights being a minimum.
(iii) Necessary service suspension. As Citilink Airlines is required to overhaul its engines every two years, there will be a significant period every two years where Citilink Airlines will either have to incur the cost of leasing other planes (assuming this is possible) or will have to suspend services. The cost of leasing other planes might be prohibitively expensive or the disruption to service might mean that conditions relating to the right to operate might not be met. As Citilink Airlines only has one plane, service would also be interrupted if there was an emergency relating to the plane, such as fire or a crash.
(iv) Age of aircraft. The aircraft being leased is old. This raises operational risks (it may not always be able to fly due to necessary maintenance), finance risks (it may require regular repair) and compliance risks (it may not meet environmental or safety standards, now or in the future).
(v) High proportion of expensive seats. The plane leased by Citilink Airlines has a high proportion of unrequired expensive seats and therefore insufficient (overbooked) cheaper seats. Although Citilink Airlines can appease customers by upgrading them, this means the airline is operating well below capacity.
(vi) Cargo. The flight route results in the airline carrying a large amount of horticultural produce. This raises various risks – that Citilink Airlines might be liable to passengers if their cargo degrades in transit, that the airline might be liable for any breaches of law by its passengers (for example, if prohibited items are transferred into or from each country. Many countries prohibit the importation of animals or meat products or plants).
(vii) On-board services. Customers are currently dissatisfied with the food provision on the flight and there is a risk that food prepared in Accra may become less appealing and even dangerous when served on a Johannesburg to Accra flight (when it has been prepared a substantial time earlier, given a six hour flight, at least an hour’s turnaround time, and time for getting to the airline in the first place). If the food makes customers ill, Citilink Airlines might be faced with compensation claims.
(viii) Pricing. There is a complex system of pricing and a large number of sales agents, and Citilink Airlines is at risk of operating at a sales value less than required to cover costs (for example, if too many of the cheapest tickets are sold).
(ix) Safety. The airline industry has stringent safety conditions and Citilink Airlines may face customer boycott or difficulty in recruiting staff if safety requirements are not met.
(x) Fuel. The aircraft cannot fly without fuel, which can be a scarce or high-cost resource. If fuel prices escalate due to world conditions, the company might not be able to meet the costs of operating.       (Any 5 points) 

(i) Lease. Citilink Airlines must ensure that the terms of the contract with the international airline ensure that aircraft and staff cannot be withdrawn without reasonable notice, and that in the event of withdrawal, substitutes will be given.
(ii) Conditions. Citilink Airlines must ensure that all staff are aware of any conditions and the importance of meeting them. However, this risk must simply be accepted as there is little Citilink Airlines can do about conditions imposed on them by the governing body of their industry.
(iii) Service suspension. Citilink Airlines must have contingency plans for service suspension, such as ensuring their contract with the international airline ensures alternative aircraft will be made available to them in the event of maintenance or damage to the aircraft, or by making arrangements to lease from a different airline in the event of emergency. As a minimum, Citilink Airlines must ensure that the airline they lease from would give them financial compensation in the event of aircraft or staff not being available so that Citilink Airlines’s customers could be compensated.
(iv) Age of aircraft. Citilink Airlines should have plans in place to be able to lease/afford newer planes if required to by law. Again, this could be written into their contract with the airline. Citilink Airlines should manage cash flow and borrowing facilities so as to be able to afford ongoing maintenance when required.
(v) High proportion of expensive seats. Citilink Airlines should negotiate a reconfiguration of the plane with the lessor so that business and first class seating could be reduced and more economy seats made available. If this is not possible with the current lessor, Citilink Airlines should investigate leasing differently configured planes from another company. If it is not feasible to adjust the plane seating, Citilink Airlines should consider its pricing and on-board facilities policies to make business and first class seats more attractive to customers. As the seats are not being sold anyway, it is probable that a reduction in prices would increase overall revenue, although this might reduce potential profit.
(vi) Cargo. Citilink Airlines should publish a cargo policy to ensure that customers are aware of their legal obligations. They should ensure that staff are sufficiently trained to discuss the contents of baggage with customers and are aware what items Citilink Airlines should not carry. They should insure against lost and damaged cargo.
(vii) On-board services. Citilink Airlines should consider entering into a contract with a company in Johannesburg to provide food for the Johannesburg to Accra journey. Obviously they must not breach any existing contract with the Accra company and so in the meantime should review the type of food provided. For example, it might be safer to only offer cold food, for example sandwiches and cake until an Johannesburg contract can be set up. Even if a new contract is set up, it might still be best to offer cold food as there is less chance of health problems arising as a result of serving cold food rather than hot food.
(viii) Pricing. As discussed above, Citilink Airlines should review the pricing policy. They should also establish limits on how many of certain types of tickets (non-refundable/single etc) can be issued for one flight and they should institute a centralised system to ensure that each agent is aware when limits have been reached. As the agents must be linked to a similar system already (to be aware of whether tickets are available for sale) this should not be too difficult to achieve) .
(ix) Safety. The company should appoint a member of staff to be specifically responsible for safety operations (such as training, updating for legal requirements, educating passengers) and should ensure that staff are regularly appraised about safety issues.
(x) Fuel. The company could take out hedging contracts against the cost of fuel. Other than this, there is little they can do about this matter, and it is another risk that has to be accepted.        (Any 5 points)                      

Consultancy projects are one-off projects designed to address adhoc issues. It is playing an increasing role in the work of internal audit. Taking on this projects enables internal auditors to extend their skills and the organization to draw on the knowledge of internal auditors. However there are dangers in becoming too involved in consultancy projects.
The resultant dangers include:

• Internal audit staff may be diverted to consultancy projects, and the regular audit reviews may be inadequately resourced.
• By taking on consultancy projects and suggesting solutions, internal audit could be getting too much involved in operational concerns. There is a serious lack of independence if internal audit has to review solutions that internal audit staff have provided.
• Management is relying on internal audit to solve problems instead of having operational staff and managers solve or preferably prevent them. Certain steps can be taken in order to avoid these problems.

• The terms of reference of the internal audit department should draw a clear distinction between regular audit services and consultancy work.
• Enough resources for regular audit services should be guaranteed. Consultancy work should be separately resourced and additional resources obtained if necessary.
• If managers are concerned about improving controls, reviewing these improvements can legitimately be included in the work of internal audit.
• Regular audit reviews and consultancy projects can be undertaken by different staff.
• If consultancy work identifies serious control deficiencies, these must be incorporated into internal audit reviews.

An AC is mandated to:

• Ensure the implementation of the recommendations in all audit reports of every MDA and MMDA.
• Follow-up Auditor-General and Public Accounts Committee’s recommendations as well as recommendations in internal audit reports.
• An AC must ensure that the head of the MDA/MMDA:
• Pursues the review and implementation of matters in all audit reports as well as financial matters raised in the reports of internal Monitoring Units in the institution, body or organisation
• Annually prepares a statement showing the status of implementation of recommendations made in all audit reports as well as the Auditor-General’s reports which have been accepted by parliament and any other related directives of Parliament:
  The statement shows remedial actions taken or proposed to be taken to avoid or minimize the recurrence of undesirable features in the accounts and operations of the institution, body or organisation, and the time frame for action to be completed.
  The statement referred to above shall be endorsed by the relevant Minister and forwarded to Parliament, Office of the president, the Director-General of Internal Audit Agency (IAA) and the Auditor-general within six months after Parliamentary decisions on the Auditors General’s reports.
• In relation to internal audit, the AC shall: Review and advise on the strategic and annual internal audit plans; Monitor the performance of internal Audit Units against its annual internal audit plans and strategic plans; Monitor the implementation agreed audit recommendations.

According to the constitution of Ghana (1992) the Auditor General shall have access to all books, records, returns, and other documents relating or relevant to those accounts.
The Audit Service Act (2000) requires the Auditor General to express his opinion on whether the accounts presented by statutory corporation are fairly presented in line with;
*Applicable statutory provisions
*Stated accounting policies of the Government
*Generally accepted accounting standards

The Auditor General Reports on the following:
The profitability, liquidity, stability and solvency of the corporation and also the performance of the shares of the corporation on the capital markets, where relevant:
*Whether there was any delay in payment of government portion of any declared dividend, if any, into the Consolidated Fund
*Any significant cases of fraud or losses and the underlying causes
*Any internal control weakness noted
*The general corporate performance indicating
– Achievement against set targets and objectives
– Whether the finances of the body have been conducted with due regard to economy, efficiency and effectiveness
having regard to the resources utilised.

In this case, the Managing Director is wrong since the constitution provides that the Auditor general shall have access to all books, records, returns, and other documents relating or relevant to those accounts.
Secondly, by demanding the performance agreement, the Auditors wants to fulfil their role to ensure that general corporate performance are in agreement with set target and objectives.

• There have been several major audit scandals in the past. The fact that audit continues and, indeed, flourishes in the light of these suggests that society has not lost confidence in audit and that it will not do so in the future.
• The major audit scandals appear to be regarded as abnormal occurrences that do not reflect on the work underpinning the vast majority of audits. The cases that have occurred in the past few years represent only a tiny minority of the audits that have been undertaken.
• Each has attracted a great deal of publicity, even notoriety, but there has been nothing to suggest that there is a systematic failure across all audits. Indeed, the publicity generated by each case indicates that these are not routine events.
• Shareholders and other stakeholders almost certainly need the reassurance provided by audit. In the absence of audit they would have little or nothing to support the credibility of the financial statements and this would undermine confidence in investment.
• It would appear that audits are desirable even if they do not offer a guarantee of detecting every single material irregularity in the financial statements. The accountancy profession has done a great deal to enhance the credibility of audit.
• Considerable amounts of time, money and resources have been invested in standard setting, monitoring and regulation of auditors. Major audit scandals are investigated as a matter of routine and any recommendations for the future regulation of audits and auditors are usually implemented as a matter of course.

ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements distinguishes the auditor’s responsibilities in relation to compliance with two different categories of laws and regulations as follows;
The provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements such as tax and pension laws and regulations; and
Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business, to an entity’s ability to continue its business, or to avoid material penalties (for example, compliance with the terms of an operating license, compliance with regulatory solvency requirements, or compliance with environmental regulations); non-compliance with such laws and regulations may therefore have a material effect on the financial statements.

• If the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations, the auditor shall obtain;
• An understanding of the nature of the act and the circumstances in which it has occurred; and
• Further information to evaluate the possible effect on the financial statements.
• Seek legal advice if sufficient information not made available on material non-compliance, which auditor suspects.
• If information cannot be obtained consider impact on opinion.
• Consider the impact of non-compliance on auditor’s risk assessment and the reliability of written representations, and take appropriate action.

• Monitor legal requirements and ensure that operating procedures are designed to meet these requirements.
• Institute and operate appropriate systems of internal control including internal audit and an audit committee.
• Develop, publicise and follow a code of conduct.
• Ensure employees are properly trained and understand the code of conduct.
• Monitor compliance with the code of conduct and act appropriately to discipline employees who fail to comply with it.
• Engage legal advisors to assist in monitoring legal requirements.
• Maintain a register of significant laws with which the entity has to comply within it’s particularly industry.

The code of ethics for professional accountants require that professional accountants or auditors accept only engagement which they are competent and capable of performing in addition they must ensure that they comply with the relevant statutory and legal requirements. It is therefore necessary for them to carry out procedures and consider the following factors:

• They must consider whether they are professionally and legally qualified to accept the engagement
• They must consider whether there are any ethical issues that may confront them if they accept the nomination. Example threats to the objectivity and independence
• They must consider whether they have the time and resources including expert knowledge and skills to serve the client
• They must consider whether they have been properly nominated and any outgoing auditor has properly parted with his client.
• They must also fulfil the professional etiquette requirement of communication with the outgoing Auditor if any as a sign of courtesy and to require information as to whether there are professional reasons for not accepting the nomination.
• The procedures should also enable the auditors to determine whether the prospective client has integrity and falls within the risk appetite of the firm.
• Therefore on the whole the procedures are carried out to enable the auditor make an informed decision whether to accept or reject the nomination.

• Firm and leadership responsibilities for quality with in the firm:
  Personnel within the firm responsible for establishing and maintaining the firms system of quality control shall have an understanding of the entire text of the ISQC, including the application and other explanatory material, to understand its objectives and to apply the requirements properly, firms are required to ensure that appropriate training is provided to ensure there is complete understanding of the objectives and procedures under ISQC1.
• Human Resources:
  The firm’s overriding desire for quality will necessitate policies and produces on ensuring excellence I its staff, to provide the firm with reasonable assurance that it has sufficient personnel with capabilities, competence and commitment to ethical principles to perform enjoyments in accordance with professional standards and regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that are appropriate in the circumstances.
• Assignment of Engagement teams
  The assignment of engagement teams is an important matter in ensuring the quality of an individual assignments. This responsibility is given to the engagement partner.
• Engagement Performance
  The firm should take steps to ensure that engagements are performed correctly, That is, in accordance with standards and guidance. Firms often produce a manual of standard engagement procedures to give to staff so that they know the standards they are working towards. Ensuring good engagement performance involves:
   Direction
   Supervision
   Review
   Consultation
   Resolution of disputes.
• Monitoring
  The standard states that firms should have policies in place to ensure that their quality control procedures are: relevant, adequate, operating effectively and complied with. In other words they must monitor their system of quality control. Monitoring activity should be reported to the management of the firm on an annual basis for correctively action to be taken.

(i) In relation to Good Life Insurance Ltd., there is a threat of self-interest arising, as a member of the audit team has an indirect financial interest in the client.
The relevant factors are:

• The interest is unlikely to be material to the client or Sally, as the investment is recent and Sally’s interest is in a pool of general investments made by the pension scheme on her behalf.
• Sally is the audit junior and does not have a significant role on the audit in terms of drawing audit conclusions or identifying audit risk areas.
• The risk that arises to the independence of the audit here is not significant. It would be inappropriate to require Sally to divest her interest in the audit client. If all the elements of risk in this situation are to be eliminated, then the junior assigned to the team could be simply changed. However such a step is not vital in this situation.
  (ii) In relation to Solar Electricals, two issues arise. The first is that the firm appears to be providing multiple services to Solar Electricals, which could raise self-interest threat. The second is that the manager assigned to the due diligence assignment wants to engage in a personal relationship with a person connected to the subject of the assignment, which could create familiarity or intimidation threat.
  With regard to the issue of multiple services insufficient information is given to draw a conclusion as to the significance of the threat. Relevant factors would be matters such as the nature of the services, the fee income and the team members assigned to each. Safeguards could include using different staff for the two assignments. The risk is likely to be significant only if one of the services provided is audit, which is not indicated in the scenario.
  In relation to the second issue, the relevant factors are these:
• The assurance team member, David, has a significant role on the team as second in command.
• The other party is closely connected to a key staff member at the company being reviewed.
• Timing.
  In this situation, the firm is carrying out a one-off review of the company, and timing is a key issue. Presently David does not have a personal relationship which would significantly threaten the independence of the assignment. Therefore, the safeguard is to request that David does not take any action in that direction until the assignment is completed. If he refuses, then his removal from the team should be considered.